Public Information Notice: IMF Concludes Article IV Consultation with Thailand

IMF News, February 10, 2000

Source details

Canonical URL

Public Information Notice: IMF Concludes Article IV Consultation with Thailand

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: February 10, 2000

Background and crisis chronology

• A decade of high growth averaging almost 10 percent per year from the mid-1980s generated resource pressures and large current account deficits financed by short-term capital inflows.
• By late 1996 investors viewed the currency as overvalued; speculative attacks led the Bank of Thailand (BOT) to defend the peg, nearly exhausting international reserves, and the BOT abandoned the exchange rate peg on July 2, 1997.
• To replenish reserves and stabilize the economy, the authorities reached agreement with the IMF on an economic adjustment program as part of an official financing package totaling more than $17 billion.
• Initial program tightening of fiscal and monetary policies and financial sector restructuring was followed by implementation delays and political uncertainties that contributed to further depreciation of the baht and a severe recession; real GDP in 1998 fell by more than 10 percent.

Policy response and macroeconomic developments

• Early program measures:
  • Fiscal and monetary policies were tightened to support external adjustment.
  • Decisive steps taken to restructure the ailing financial sector (insolvent banks intervened, depositors protected; insolvent finance companies suspended).
  • Government provided financial assistance for bank recapitalization, tied to debt restructuring and safeguards on use of public funds.
• Subsequent easing to support recovery:
  • Fiscal policy eased in early 1998 and became expansionary through 1998/99 to cushion the recession and restore growth; social safety net spending doubled from 1 percent of GDP pre-program to more than 2 percent of GDP in 1998/99.
  • Monetary policy eased as balance of payments and exchange rate stabilized; BOT overnight repurchase rate lowered from more than 25 percent in late 1997 to less than one percent by mid-1999.
• Financial sector reform priorities:
  • Enhanced prudential framework to be phased in through end-2000 to align capital adequacy and loan classification/provisioning with international best practice.
  • Corporate debt restructuring promoted via bankruptcy reform, elimination of tax disincentives, and encouragement of voluntary restructuring under the Corporate Debt Restructuring Advisory Committee (CDRAC) chaired by the BOT.

Recovery outcomes (1999) and external position

• Economic rebound in 1999 under supportive macro policy and restored financial confidence:
  • Manufacturing production in the last quarter of 1999 increased by more than 15 percent from a year earlier.
  • Import growth accelerated to more than 30 percent.
  • Export growth in October/November rose to about 18 percent.
  • For the year as a whole, GDP growth is likely to reach 4 percent, with a virtual absence of inflationary pressures.
• External accounts:
  • Current account registered a surplus in 1999 of $11 billion (9 percent of GDP).
  • Gross international reserves increased to almost $35 billion, more than double the stock of outstanding short-term external debt.

Executive Board assessment and policy recommendations

• General assessment:
  • Directors commended impressive progress in economic recovery and restoring financial stability, with rebuilt international reserves and restored exchange rate stability; recovery is broad-based but remains incomplete and fragile.
• Macro policy stance:
  • Present accommodative macroeconomic policy stance considered appropriate to sustain recovery.
  • Recommendation to continue fiscal stimulus through 2000 to maintain growth momentum and preserve social safety net spending until employment and social conditions show decisive improvement.
  • If the budget strengthens due to significantly higher than expected growth, Directors generally encouraged setting aside higher revenues for deficit reduction to stabilize public debt.
  • Fiscal consolidation needed over the medium term to reverse recent public debt increases; much consolidation expected to occur automatically with output recovery, but authorities should consider measures to broaden the tax base.
• Monetary and exchange rate policy:
  • Low money market rates' benefits had been slow to transmit to lower bank lending and deposit rates; a further generalized fall in interest rates—including deposit rates—would support recovery and bank balance sheets.
  • Directors welcomed BOT’s continued adherence to a flexible exchange rate regime and its intention to introduce an inflation targeting framework over the medium term, conditional on preconditions such as transparent institutional arrangements and clear accountability.
  • Progress toward the new Bank of Thailand Act and the Financial Institutions Law welcomed as contributing to independence of monetary management and financial system transparency.
• Financial sector and structural reform priorities:
  • Immediate priority: accelerate decisively bank and corporate debt restructuring.
  • Concerns about continuing high level of nonperforming loans; additional measures needed in three areas:

1. Keep bank capital position under close review despite limited success under largely private sector-led recapitalization. 2. Strengthen implementation of the new bankruptcy and foreclosure framework to rebuild credit discipline; expeditious handling of a few test cases, including those where publicly owned banks are creditors, could have salutary effects; assess and modify bankruptcy procedures where shortcomings exist. 3. Enhance competition and efficiency by reprivatizing remaining intervened banks and avoid further delay in restructuring the state-owned Krung Thai Bank.

• Corporate debt restructuring: welcome progress by CDRAC but recommend further strengthening of the CDRAC framework as a priority.
• Other medium-term structural priorities: tax reform, trade liberalization, strengthening education, and improving the statistical database.
• Supporting policies to mitigate employment impacts of structural reforms are critical to foster broad public support.

Key statistics (Thailand: Selected Economic Indicators, 1996–99)

• Real GDP growth (percent): 1996: 5.9; 1997: -1.8; 1998: -10.4; 1999 Est. Proj.: 4.0
• Consumption: 1996: 7.5; 1997: -1.2; 1998: -12.0; 1999: 5.5
• Gross fixed investment: 1996: 7.4; 1997: -20.3; 1998: -38.1; 1999: 3.0
• CPI inflation (end period, percent): 1996: 4.8; 1997: 7.7; 1998: 4.3; 1999: 0.7
• CPI inflation (period average, percent): 1996: 5.6; 1997: 8.1; 1998: 0.3; 1999: (not separately listed)
• Gross domestic investment (percent of GDP): 1996: 41.7; 1997: 33.2; 1998: 21.4; 1999: 22.0
• Gross national saving (percent of GDP): 1996: 33.6; 1997: 31.1; 1998: 34.1; 1999: 31.0
• Foreign saving (percent of GDP): 1996: 7.9; 1997: 2.0; 1998: -12.7; 1999: -9.0
• Central government balance (percent of GDP): 1996: 1.9; 1997: -0.9; 1998: -2.4; 1999: -3.0
• Revenue and grants (percent of GDP): 1996: 18.9; 1997: 18.6; 1998: 16.2; 1999: 15.1
• Expenditure and net lending (percent of GDP): 1996: 17.1; 1997: 19.5; 1998: 18.7; 1999: 18.1
• Overall public sector balance (percent of GDP): 1996: 1.7; 1997: -2.1; 1998: -3.3; 1999: -4.8
• Cost of financial sector assistance (percent of GDP): 1997: ...; 1998: 0.6; 1999: 2.5
• Overall public sector balance, augmented for the cost of financial sector assistance (percent of GDP): 1996: -2.7; 1997: -5.8; 1998: -6.6
• M2A growth (end period, percent): 1996: 12.7; 1997: 6.1; 1998: 3.3
• Current account balance (billions of US$): 1996: -14.4; 1997: -3.1; 1998: 14.3; 1999: 11.2
• Current account (percent of GDP): 1996: -7.9; 1997: -2.0; 1998: 9.0
• Exports, f.o.b. (percent of GDP): 1996: 54.7; 1997: 56.7; 1998: 52.9; 1999: 55.6
• Exports growth rate (in dollar terms): 1996: -1.9; 1997: 3.8; 1998: -6.8; 1999: 5.1
• Exports growth rate (volume terms): 1996: -3.6; 1997: 9.3; 1998: 8.3
• Imports, c.i.f. (percent of GDP): 1996: 70.8; 1997: 61.3; 1998: 40.6; 1999: 46.4
• Capital account balance (billions of US$) 4/: 1996: 16.5; 1997: -15.5; 1998: -16.8; 1999: -9.6
• Medium- and long-term capital (billions of US$): 1996: 11.3; 1997: 9.9; 1998: 5.7; 1999: 1.8
• Short-term capital (billions of US$) 4/: 1996: 5.2; 1997: -25.4; 1998: -22.5; 1999: -11.4
• Overall balance (billions of US$): 1996: 2.2; 1997: -10.6; 1998: 2.6
• Gross official reserves (end year, billions of US$): 1996: 38.7; 1997: 27.0; 1998: 29.6; 1999: 34.8
• (Months of following year's imports): 1996: 7.6; 1997: 8.0
• (Percent of short-term external debt): 1996: 103.0; 1997: 77.4; 1998: 125.7; 1999: 249.0
• Forward position of BOT (end year): 1996: -4.9; 1997: -18.0; 1998: -6.7
• External debt (percent of GDP): 1996: 49.8; 1997: 62.0; 1998: 76.5; 1999: 59.6
• External debt (billions of US$) 5/: 1996: 90.5; 1997: 93.4; 1998: 86.3; 1999: 76.1
• Public sector external debt (billions of US$): 1996: 16.8; 1997: 24.3; 1998: 31.6; 1999: 36.5
• Private sector external debt (billions of US$): 1996: 73.7; 1997: 69.1; 1998: 39.6; 1999: (not separately listed)
• Debt service ratio (percent of exports of goods and services) 6/: 1996: 12.0; 1997: 13.9; 1998: 20.7; 1999: 20.4

Public Information Notice: IMF Concludes Article IV Consultation with Thailand (February 10, 2000).

References

• Thailand and the IMF
• Public Information Notices
• Article IV
• https://www.imf.org/en/home